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Earnings Season: There’s No Business Like US Business

1 November 2012 in Trading Ideas

Ford Motor’s (F) earnings report earlier this week presented a microcosm for much of the third-quarter earnings season: Large overseas exposure is not the place to be for growth on the bottom line.

As the Wall Street Journal reported on Tuesday, the Detroit carmaker pushed its quarterly profit margin in North America to 12% — the highest in its history – delivering a pretax profit of $2.3 billion. Meanwhile, the company posted a pretax loss in Europe of $468 million.

Is that enough of a contrast for you?

Ford also said its European operations will lose $1.5 billion for the full year. The company said last week it will cut 6,200 jobs there and close three plants in an effort to save $500 million – certainly not what the struggling European labor force wanted to hear.

But this is largely par for the course, according to an article last weekend by Morningstar analyst Robert Johnson. In his view, the earnings reports up to the end of last week hadn’t been pretty and “the degree of ugliness seems to depend on how much exposure a company as to Europe and, to a lesser degree, China.”

Johnson says that revenue of S&P 500 companies from non-US countries averages about 20% to 25%, and he was “shocked” by how dependent some companies had become overseas revenue. He pointed to two specific profit-report disappointments in 3M (MMM) and DuPont (DD), which derive 66% and 61% of their revenue from outside the US, respectively.

Tech stocks also have taken it on the chin, falling 4.1% since Oct. 5. While Johnson says tech firms aren’t as dependent as some on non-US revenue, they did get much of their growth from emerging markets. In addition, European governments and their agencies have always been big buyers of tech gear.

The idea of limiting exposure to non-US revenue is the thesis of the All-American motif, which comprises companies with sales generated only from the US. This portfolio of stocks is off 2.4% in the past month. The S&P 500 has slipped 1.2% during the same timeframe.

Performance data was as of 11/1/2012. Performance data and returns are based on past and are not representative of results an investor could expect to achieve. The 1-month and 3-month return shows how a particular benchmark motif could have performed over a stated period of time. Returns of individual motifs do not take into consideration certain fees and/or commissions, corporate actions, or other activity that can affect the return an investor could expect to incur. The performance results attempt to follow a standardized and consistent methodology for performance reporting. While we believe the performance data is gathered from reliable sources, the information that generates performance results uses historical data that we believe to accurate but has not been validated and may contain errors in pricing or other conditions. Reference to return of index does not imply its performance is comparable to a motif, but rather serves to provide a reference point.  For detailed information on how we calculate returns, please visit www.motifinvesting.com.